The global competition for skills and capital has been intense. One merely needs to reflect on the number of Kiwi trained engineers, medical professionals and business people now living comfortably offshore to recognise that over the last decade we have lost a significant level of our home grown skill base.
Today’s budget is a major step in the long term aim of reversing this resource drain with the added hope that some of our best and brightest and wealthiest will consider a return home.
In 1999 we saw a newly elected Government increase personal taxes from a top rate of 33% to 39%. For many this move was a thinly veiled jealously tax and was untenable. Individual reactions varied.
The law of unintended consequences certainly holds true when one reflects on the changes that have followed in the wake of the 1999 tax increases.
We have seen the outflow of highly skilled and highly paid Kiwis offshore. So much so that in 2003 the previous Government took steps to stem the flow by reducing tax barriers to migration to New Zealand – an initiative that finally came into effect on 1 April 2006 with the transitional tax resident concession.
On the local front we saw an explosion in negatively geared rental property investment. Taxpayers were happy to lose money on their rental investments because the Government was handing them back 39% of each dollar they lost via tax refunds. We now see that over 9,000 recipients of working for families tax credits leveraged those credits by reducing their incomes through losses from rental investment.
Tax free capital gains were an added bonus as demand for rental investment pushed up prices. Consumption driven inflation and a roller coaster ride of high interest rates were not far from our minds. None of this was good news for New Zealanders many of whom now visit their children and grandchildren based in Australia.
The budget will take way some of the incentives that have fuelled the rental market. Rental losses will still be offset against other taxable income. However the 33% tax rate and the removal of depreciation allowances for rental buildings will focus an investor’s mind. The reality is that it will cost the investor $3 to save $1 in tax, not a pleasing prospect in a flat property market. The 28% PIE rate will provide a good contrast for those investors who may now prefer to have their nest egg in the ‘bank’ rather than bricks and mortar.
It is not a big bang approach but rather a well thought out series of levers which will hopefully have the effect of rebalancing investment preference and assist in investment into technology and economic growth to the benefit of the entire country.
The 33% rate will also remove many concerns facing those that departed shortly after 1999 tax increases. The foreign income exemption available to those that have been non-resident for 10 years or more will be an added advantage.
We need skills and capital to remain here and for investment preference to be balanced towards economic growth. Today’s budget announcements will assist in turning the ship around.